We picked the brains of various asset managers and came up with five hot stock picks for 2014.
This financial services company boasts a strong management team, renewed focus on returns, the potential of further African interests and a well-provisioned loan book. All these factors mean it is only a matter of time before the company starts delivering strong returns again. Johan Strydom, senior portfolio manager at Sanlam Private Investments says he is very comfortable having this stock in his portfolio.
Analysts also expect that the sale of the underperforming offshore business will allow management to focus on the local business and the group’s established network in Africa.
One of the top 100 companies listed on the Johannesburg Stock Exchange (JSE), Invicta Holdings currently manages assets in excess of R12 billion. It is also the only JSE-listed company to achieve Top 100 Performers status for 18 consecutive years, clear evidence of a top management team. Management has proven itself with a track record of growing the company earnings with 28% compound growth per year over the last 13 years. Strydom says this track record, together with the prospect of new contributors, Kian Ann Group in Singapore and HPE Africa, makes him optimistic about future new performance. “This and an attractive historic PE valuation of 12.6 makes it a must-have for 2014,” he says.
“Despite concerns around declining sales of personal computers and mobile strategy execution, Microsoft represents an attractive investment opportunity. The business divisions have solid fundamentals with an attractive outlook and there is potential upside if the company successfully carries out its mobile and entertainment strategy,” says Aslam Dalvi, investment analyst at Kagiso Asset Management.
Around 90% of profits in the business division are derived from corporate customers, where demand is expected to stay strong. While competition has increased from companies such as Google, competitors have made little progress in the corporate market, as corporate customers are already heavily reliant on the Microsoft productivity ecosystem. Dalvi points out that there is still low PC penetration in emerging markets, which provides scope for further growth.
“The company has strong underlying cash-flow generation and is available to investors at a bargain price. We believe Microsoft is a very attractive investment,” he says.
4. Life Healthcare
Analyst Andrew Olanow of Morgan Stanley says Life Healthcare, which operates 63 hospitals in South Africa, is a play on solid underlying defensive growth. The company’s high margins still have room for upside and that valuation looks reasonable. “With any price regulations by the South African government for private hospitals delayed until 2014, we see added price pressure as unlikely before 2015,” Olanow writes. He adds that the company’s excess cash should drive a high dividend yield. Olanow’s base case view is for a 9% increase over the next 12 months. However, his most bullish scenario is that the stock will rise 33% over the next year.
5. Kumba Iron Ore
While the latest statistics indicate significant production problems from their Sishen mine, the Kolomela mine has delivered to expectations. “The iron ore price is remarkably firm while Kumba’s share price has responded to poor production numbers. The market’s dim view on production problems might well have created a buying opportunity,” says Van der Merwe.
Iron ore prices had an overall good run in 2013, compared to other base metals. The price peaked to a high of $154 per ton in February, due to the restocking carried out by Chinese steel mills and heightened demand from steel end-consumers, particularly the Chinese construction sector.
Demand for iron ore remained relatively strong throughout 2013. Domestic supply in China was insufficient to meet the demand triggered by the steel industry and the housing market. This led to an increase in Chinese imports the year, which significantly impacted the demand for the metal worldwide.
Outlook for the year ahead
Chris Freund, head of SA multi-asset at Investec Asset Management, says he anticipates that the South African bond market will weaken if global bond markets sell off on the back of quantitative easing tapering. “Because the yield curve is very steep in South Africa, it’s not clear whether South African bonds will outperform cash or whether bonds will underperform cash,” he says.
There are three factors that drive equity markets: valuation, the economic cycle and the extent of liquidity. Even though valuations are relatively demanding, this should not put a dampener on South Africa’s equity market returns over 2014. It’s only when valuations are at extremes, very expensive or very cheap, that they are likely to drive returns.